Since Israel was founded, many social services have been provided through non-governmental channels. Healthcare, for example, was initially provided by the Histadrut workers’ union. However, there is a widespread perception that in recent years more and more welfare services are being outsourced by the government to private providers, and that this process is short-changing recipients, who are often the weakest and most vulnerable members of society.

Prof. Reuben Gronau, a Policy Fellow in the Taub Center’s Economic Policy Program and an economist at the Hebrew University, has produced a new study of this phenomenon published in the Taub Center’s State of the Nation Report 2011-2012. On the conceptual level, Gronau explains why public administration in this sector is justified. Competition alone leads to efficient provision when customers are well equipped to identify and choose the best providers. But consumers of social services are often unable to assess the quality of the services they receive, and are unable to select a service provider of their choice. These consumers tend to be vulnerable, to lack their own resources, and to be infrequent purchasers of a service whose quality is difficult to evaluate. The government is in a good position to provide the necessary oversight.

Additionally, social services provide an overall social benefit which extends far beyond the services’ direct and immediate benefit to individual consumers. For example, a service that promotes healthy, educated and well-functioning individuals has positive ramifications for those living around them, as well. Gronau adds that the public funding of social services reflects the public’s preference for equality.

As for Israeli privatization in practice, the study finds that the current public discussion is grounded on a weak basis research foundation stating that the intensity of the dispute over “privatization” of social services is disproportionate to the extent of information. There are not even economy-wide figures that can provide an indication of the extent of the phenomenon.

During the past decade, there has not been any significant change in government transfers to local authorities, non-profits and the business sector, or in the relative contribution of public bodies involved in the provision of services. Likewise, the numbers do not suggest a trend of replacing internal activities with the purchase of services – something that would indicate a transition from public operation to outsourcing. Finally, employment data do not indicate a decline in the number of social service employees as a share of the total number of jobs in the Israeli economy; on the contrary, their share has increased.

However, Gronau does find some worrisome indications regarding the quality of privately provided social services. Two developments are particularly telling.

First, wages of private sector employees in the social services sector are substantially lower than those of public sector workers. The first figure shows wages for workers from different sectors for the three main areas of social services: health and welfare, education, and community services. The red bar shows wages for public sector workers; the other bars show wages for workers in the same field from public non-profits, private companies, private non-profits and other providers. In each case, it is evident that public sector salaries are much higher – approximately 50 percent higher than the median alternative provider. While salaries are not a direct measure of quality, Gronau thinks that in the service sector there are sound reasons to believe that higher salaries translate into higher quality of service. Higher salaries should enable the public sector to draw better qualified workers in the first place, and to provide them with more motivation and higher morale once they are at work.

A second development is that the fraction of social services financed directly by households has risen dramatically. The second graph shows the growth in household-financed social services between 1997 and 2009. Gronau finds that total expenditure on social services in Israel has actually grown more slowly than the economy as a whole over the past fifteen years, but the part funded by households has grown far more quickly than overall economic growth. This corroborates findings of other Taub Center studies showing that there is an ongoing tendency in Israel for placing an increasing share of the cost of social services directly on the user, thus reducing the extent of social insurance enjoyed by Israelis. The declining scope of public provision compels an increasing number of people to seek private sector alternatives. It is also possible that increased private outlays testify to a declining quality of services, particularly health services, provided by the government. If so, indigent clients – who lack a private option – are obtaining lower quality services.

The study attributes critical importance to the overall approach to privatization. Improved efficiency can express itself in either a smaller expenditure for the same level of service, or an improved level of service for the same expenditure. The prevailing mindset in Israel has been the former, but particularly in light of the already reduced government funding, the latter approach is the one that Gronau recommends. In particular, he suggests that consumer contributions to the funding of services can have a positive impact. Such increased consumer funding would enhance consumers’ bargaining power regarding service quality and offer providers competitive incentives. However, in order to avoid reductions in quality, greater consumer contributions need to be accompanied by commensurate increases in government funding. Gronau believes that improving the quality of government-provided social services would curb the emergence of private organizations (such as private hospitals and colleges) which, in his opinion, threaten the public system.

Gronau concludes that privatization of social services can be beneficial, but that capitalizing on these benefits requires serious quality control on the part of the government, quality control at a level that is currently lacking.